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International Tax Evasion and What Is Being Done to Combat It
In this piece, I will be discussing international tax evasion – with a focus on individual tax evasion, and what is being done to prevent it. The Inter-Agency Task Force on Financing for Development defines tax avoidance as “a legal practice, and internationally involves tax planning and arbitrage across borders”. It is an “illegal action that is, in most countries, characterized as a crime”. In order to combat both tax avoidance and evasion, tax administrations have been increasing the availability of information. This action has been at the core of recent initiatives in international tax cooperation.
Recently, Congress and the President have proposed several ways of addressing tax evasion and avoidance. The Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations have also addressed this issue. The HIRE Act (P.L. 111-147), which was voted for in Congress, included several anti-evasion provisions, and the P.L. 111-126 also included foreign tax credit provisions, which were directed at perceived abuses by U.S. multinationals. (Development Finance)
The Foreign Account Tax Compliance Act (FATCA), which was included in the HIRE Act, introduced required reporting of information by foreign financial intermediaries and withholding of tax if information is not provided. In the past, the United States has relied on the Qualified Intermediary (QI) program to collect their information. The QI program did not require US financial institutions to identify the true beneficiaries of interest and exempt dividends. QI is are also subject to audit. The FATCA requires foreign institutions to report information on asset holders or they will be subject to a 30% withholding rate. This act will make a difference on the individual level of tax avoidance. (Gravelle)
Individuals, people like you and me, can evade taxes on passive income by simply not reporting income earned abroad. Passive income includes interest, dividends, certain rents and capital gains. You could also avoid paying your taxes by setting up shell corporations and trusts in foreign haven countries to channel funds into foreign jurisdictions. For example, if you wanted to easily evade the tax on domestic income, all you have to do is go online, open a bank account in the name of a Cayman cooperation (for a minimal fee), and then begin to transfer money electronically with no worry of reporting to tax authorities. (Development Finance) This money can then be used to make investments in the US or abroad. If it is that simple, why has the US enacted stricter avoidance measures sooner?
Individual tax evasion has cost us a lot of money. However, it is hard to determine just how much money due to the fact the estimates are based on the amount of assets held abroad whose income is not reported to the tax authorities. Estimates of tax avoidance generally are not uniform or comprehensive in nature, due to the fact that measurement of tax gaps are not made in most countries. In order for countries to increase their proactivity regarding tax avoidance and evasion, they need to agree to exchange information with respect to taxpayers. By doing so, countries can become more aware of the global activities taxpayers are engaging in and impose tax that should be due.
High net worth individuals outside the US have invested $1.5 trillion, and if we used a rate of return of 10% and a tax rate of around one-third, the tax amount should be around $50 billion. The Tax Justice Network estimated a worldwide revenue loss for all countries of $225 billion from individual tax evasion. This was found using a 7.5% rate of return and a 30% tax rate. However, this estimate was made in 2005. The new numbers would much higher, and probably would have the US approaching $100 billion. (Gravelle)
As mentioned above, stricter avoidance measures are needed in order to combat tax evasion. However, it is difficult to address these issues without changing the tax law. One approach to addressing individual evasion would be to increase and focus cooperation with the OECD and G-20 to improve information and persuade tax havens to enter into exchanges, preferably an electronic information exchange. The Tax Justice Network also has suggested a United Nation global tax cooperation standard, complete with a panel to determine complaint states, and deny recognition to non-complaint jurisdictions. (Avi-Yonah)
Tax evasion is a prevalent world issue that needs to be addressed. Highlighted are some of the solutions to this practice, but also highlighted is how easily it is committed. Eventually the world will need to move towards a global standard to prevent tax evasion. This would be the most efficient plan of attack to minimize the crime. Until this is done, tax evasion will continue and billions of dollars will go unreported creating a negative impact on the economy at a global level.
Avi-Yonah, Reuven S. “International Tax Evasion and Avoidance: What Can Be Done?” The American Prospect., vol. 27, no. 2, 2016, pp. 63–67.
Gravelle, Jane G. Tax Havens: International Tax Avoidance and Evasion. 15 Jan. 2015, fas.org/sgp/crs/misc/R40623.pdf.
International efforts to combat tax avoidance and evasion | Inter-agency Task Force on Financing for Development. In: United Nations. https://developmentfinance.un.org/international-efforts-combat-tax-avoidance-and-evasion. Accessed 1 Mar 2018